Crypto’s growth potential and seemingly endless increase in value, has attracted big money like bears to honey. Are they sweetening or souring the pot?
Once the realm of idealistic technologists, bitcoin was presented as a decentralized, anonymous currency, free of government or other “external” intervention. In the meantime, though, cryptocurrencies have evolved into a valid investment vehicle, causing even big financial institutions and investment firms like (and mind you, this is just the tip of the iceberg) Blackrock, VanEck, and Valkyrie to take notice. If you need further proof, just three days after their launch, spot Bitcoin ETFs took in an astounding 2 billion USD.
If you are unfamiliar with the term, ETFs (exchange-traded funds), are very similar to the stocks or shares of a company. But, instead of owning a “portion” of a business, the investor “owns” part of a fund (but not the underlying asset). ETFs generally “track” the performance of a basket or collection of the actual assets. This allows investors or traders to gain exposure to a specific asset (or, as mentioned above, a selection of assets) directly through a regulated public exchange without the obligation or drawbacks of owning the underlying asset or assets. Additionally, the fund (or firm offering it) must hold and manage the equivalent amount of the asset if it is a spot ETF – so if 100 investors hold 10,000 USD worth of spot Bitcoin ETFs each, the fund must own 1,000,000 USD worth of actual bitcoin. In much more practical terms, this also allows bitcoin to be added to an investment portfolio like any other stock, index, or asset without signing up for a cryptocurrency exchange, acquiring a wallet, and then sending your crypto assets to your wallet.
But how has this interest from financial heavyweights and staggering capital inflow affected the cryptocurrency market at large?
How Big Money investments are positively changing the crypto market
Many cryptocurrency purists would be quick to point out that the introduction of so-called “Big Money” goes directly against cryptocurrencies’ initial ethos of being decentralized, anonymous, and free of intervention. The reality is that the increased liquidity Big Money brings can benefit cryptos by stabilizing their prices. One of the most frequently highlighted issues against using cryptocurrencies as legitimate real-world currencies is their volatility. When the value swings widely, it becomes a liability for the business that accepts them as they could receive payment at a higher rate, which could be worth much less at a later date. For example, according to an IMF article, after reaching 65,000 USD in April of 2021, bitcoin cratered, losing about half of its value. Higher liquidity and more holdings should smooth out such abrupt price changes.
Another benefit is legitimacy through regulation. As mentioned previously, ETFs are offered on regulated public exchanges and, due to this, are also regulated as assets. This is also likely to attract more capital, which will result in more liquidity and even higher price stability (in theory, please remember that markets and market dynamics are affected by a plethora of factors).
Another potentially impactful data point, according to investment and wealth management firm VanEck, one of the first issuers established for ETFs linked to bitcoin and ethereum, estimates that up to or more than 196 billion USD worth of bitcoin is used or held in ETFs, by private and public companies, and countries. A mass sell-off, caused by any of these entities or groups, either profit-taking (selling at high rates to, as the name suggests, take profit) or panic selling, could cause volatility or the price to drop.
Is there a drawback or disadvantage to Big Money investments in crypto?
What goes up must come down; for every action, there is an equal and opposite reaction. Yes, these are laws of nature, but they can easily be applied to the markets. Supply and demand are inextricably connected, as are support and resistance, which result from sellers and buyers pushing and pulling at the price.
Price stability, as a result of increased liquidity, may benefit long-term investors. But, the opposite, volatility, might be the reason so many traders are attracted to cryptocurrencies. Volatility also creates more opportunities in the short term, albeit with increased market exposure that can only be managed to a certain degree.
Regulation and cryptocurrencies
As more people are exposed to cryptocurrencies, different types of ETFs will be offered, and the number of ETF issuers will increase. Governments will want regulations in place to protect investors. ETFs are already regulated as assets or investment vehicles offered on public exchanges.
Although this may make cryptocurrencies less anonymous and decentralized, it comes with security and legitimacy. Cryptocurrencies will be less susceptible to price manipulation and other schemes that can hurt the market. Ultimately, this can further legitimize cryptocurrencies and bring them into the mainstream.
Investing in cryptocurrencies post Big Money?
The adoption of cryptocurrencies by Big Money may be an inevitability at this point. This means that the days of astounding gains and devastating drops are likely over, as are the risks and the opportunities that come with them.
Although cryptocurrencies’ wildest days may be behind them, they are entering a much more mature period. Does this mean this period may be characterized by stability, growth, and maybe desirable safe-haven status?
Trading Crypto CFDs
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